Given the persistent rally over the past two weeks yesterday could at best be described as a minor pullback with emphasis on minor. In fact, $SPY opened at the 5 EMA and closed at the 5 EMA with tech throwing in another new high into the mix. Basically a non event. I’ve been trading very actively trying to take advantage of the little up and down action we are getting in between large swaths of a tight range chop. I took some profits on the dip yesterday and overall the swing positions improved with the dip.
The case for the swing positions remains very strong despite it having been a very difficult trade to scale into and yesterday’s warning shots of the World Bank reducing its global growth estimates, Lufthansa getting hammered, Airbus losing a $16B order, Iraq disintegrating into chaos and the specter of rising political uncertainty with Cantor’s loss in the primary are all part of a chorus of baby steps that point us in the right direction.
The charts of course tell the story: This rally has been built on fluff and the signs are mounting:
$QQQ. Negative divergence central:
Yesterday I pointed out that the $SPX is now 300 points above its 100 weekly MA, its highest deviation ever. I have to tell you that is one powerful deviation from the mean and one that encourages my conviction on the swing case despite the condition having persisted for weeks now:
Yesterdays renewed magical recovery will, in my view, eventually wear buyers out. From what I understand it was one small arbitrage buy program that launched the bounce and buyers joined reflexively, but the $IWM chart pattern continues to spell danger ahead:
As you’ll note the 5 EMA remains the single defining save target for the major indices yet underneath the surface we saw additional encouraging baby steps yesterday.
Small pullbacks within a strong rally perhaps, but the bigger picture spells much more downside to come and while I can’t predict the day to day the weekly $NYSI chart informs me to remain patient with the swing positions:
We are about as overbought as we can get and as global risk is knocking on the door I’ll patiently await the outcome of an eventual meet & greet. In the meantime I will continue to trade very tactically. Retail sales this morning will likely dominate the initial reaction and I seek to fade early morning strength (if there is any) to trade the Thursday/Friday before OPEX low. As with yesterday I will seek to take some gas off the pedal and lock in some profits as they avail themselves and will aim to trade calls on weakness.
The key signal remains to watch for a closing break of the 5EMA and see an immediate test of the 21MA and a break of the lower $ES trend line:
Best case scenario against all odds remains a weekly close below 1,900 $SPX. Sentiment wise it is fascinating to see how most people have now completely given up on the prospect of any downside whatsoever. The relentless action has worn many down. I get it. But yesterday was a small sign that risk does indeed still exist and in the end, I think we will be surprised how fast and deep this market can drop. But until then, tactical day trading and opportunistic positioning remains the mantra of the moment.